RIM gets upgraded on services strength

RIM upgraded to speculative buy on services strength

These days, with shares of Research In Motion Ltd. constantly sliding to new lows, finding an analyst who will actually recommend the stock is a little surprising.

It’s not exactly the most ringing of endorsements, but Sameet Kanade with Northern Securities has taken such a step and bumped up his rating on RIM to speculative buy from sell while raising his target price to $26 from $18.

“We have gone back to the drawing board to analyze what the current valuation implies and whether we view the current valuation as an opportune time to build positions in RIM — no, this is not a typo,” he said in a note to clients Tuesday.

RIM shares were up 99¢, or 5.32%, to $19.60 in TSX trading at 3:20 p.m. ET.

In the past two years, RIM has lost significant smartphone market share to the likes of Apple Inc.’s iPhone and a veritable fleet of Google Androids while its PlayBook tablet strategy has “left management bereft of credibility” and RIM further behind the pack.

“However, RIM has significant strength and stability within its services business, which should provide a platform and, more importantly, time for management to reverse or at least maintain its current market share within the robust smartphone arena,” he said.

RIM still has about 70 million subscribers producing $4-billion in annual revenues. While North America is a concern, the BlackBerry remains popular in overseas emerging markets, suggesting that instead of outright subscriber reductions, RIM will instead see the rate of growth slow.

Most importantly, RIM has seen the writing on the wall and announced plans to open up its network operating centres to other devices.

“This represents acceptance by RIM that other competing devices had begun making inroads into its core enterprise market share,” Mr. Kanade said. “With the opening up of the NOC to non-BlackBerry devices, we believe RIM can increase its service revenue by more than 2x within the next 24 months. Consensus expectations, and even our forecasts, do not capture the complete impact of this potential.”

As well, RIM still has “significant room to manoeuvre” when it comes to handset margins, and will need to do so to remain competitive. The average price of a RIM handset in the second quarter was about $280, giving the company some 30% room for further price reductions.

RIM also has a potential advantage in near-field communications technology, which allows for easier data exchange and transactions, due to its superior data security, dominance of the enterprise market and focus on NFC applications as a priority.

“The above-mentioned strengths should enable management to stabilize growth and, more importantly, growth expectations over the next two to three quarters,” he said. “We believe there is a significant margin of safety built into the current valuation, which may provide an attractive entry point for value investors.”

Before Mr. Kanade and Northern Securities began official coverage of RIM at the end of September, Mr. Kanade wrote an “open letter to RIM management.” The letter, written in April, called for the company to ditch its co-chief executive structure.

As well, the chief executive of both Northern Securities and Jaguar Financial Corp. is Vic Alboini, who owns 8% of RIM’s stock with 13 institutional partners and has been the public front of an activist campaign demanding a shakeup at RIM.

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